OK folks, I mentioned this in a different thread. I think there is a lot of good advice on these forums but one thing confuses me very much.

Many folks on here say they save for college by overstuffing their retirement accounts, and then they'll use retirement accounts for college when their kids are college age. I have seen a lot of advantages of this, including flexibility, not counted in FAFSA, etc.

My question is simple. How do you withdraw money from retirement accounts when your children are college age that you don't end up having to pay penalties and/or taxes? I understand that Roth IRA contributions can be withdrawn for any reason at any time. However, the remainder of accounts I don't believe can be touched prior to retirement age without taxes and/or penalities.

For those that are in college, have you successfully withdrawn from your retirement accounts, excluding Roth IRA contributions? How did you do it?

1) For folks with high saving rate, their retirement will be fully-funded when their kids are going to college. They could fund most of their kids' college education from their annual savings. Beyond that, they just need to withdraw a small portion of their Roth IRA contribution to cover the difference. My annual saving is 50K to 60K per year. I do not need to save for my kids' college education.

2) For folks with a realistic target of their kids' college education like me, we have a budget of the amount that we are willing to pay for our kids' college education. In my case, it is 30K per kid per year. I am not willing to pay a lot more than that. If the child wants to spend more, they have to fund the difference.

I get that a person can overstuff retirement accounts younger in life, then stop saving for retirement and instead use that money to cash flow college. However, that's not using retirement accounts to pay for college. Rather, it is paying for college in lieu of saving for retirement, which may be a good idea or bad idea based on one's individual circumstances.

I hope that we'd all agree that (as Bogleheads) it would be better to save up for a children's college education in advance, if a person was financially able to.

My question was how do you withdraw money from your retirement accounts without paying taxes or penalties. I don't see how that is possible, except for Roth IRA contributions, or if a person reaches retirement age prior to kids entering college.

Yes, you can (if you separate employment) convert a 401k to a Roth IRA along the way, but you have to pay ordinary income tax on the money that you convert. And, this requires that you separate employment, and don't mind paying a high tax rate to make the conversion. I don't think this is a great strategy but technically it's allowed.

I believe your analysis is correct. The only exception I know of is US Savings Bonds, which under certain circumstances can be redeemed and if all the money, including the original investment, is used for legally specified, qualified, educational expenses, depending on who bought the savings bonds and when (that's the way Congress wrote the law), the interest can be permanently tax free. The requirements are stringent. Here's a link.

miamivice wrote:OK folks, I mentioned this in a different thread. I think there is a lot of good advice on these forums but one thing confuses me very much.

Many folks on here say they save for college by overstuffing their retirement accounts, and then they'll use retirement accounts for college when their kids are college age. I have seen a lot of advantages of this, including flexibility, not counted in FAFSA, etc.

My question is simple. How do you withdraw money from retirement accounts when your children are college age that you don't end up having to pay penalties and/or taxes? I understand that Roth IRA contributions can be withdrawn for any reason at any time. However, the remainder of accounts I don't believe can be touched prior to retirement age without taxes and/or penalities.

For those that are in college, have you successfully withdrawn from your retirement accounts, excluding Roth IRA contributions? How did you do it?

Howdy

You have got it right. The only useful technique re retirement money is to pull out Roth contributions, which do come out tax free.

I think a lot of the discussion is due to posters having different life experiences and ideas about funding education. Funding a Roth with the option to use it for a child's education preserves future flexibility in the Roth funds, but I have never quite figured out why you would want to use Roth money and lose years of tax free compounding.

529s are very useful. They are ideal for funding children's education, especially if the contributions are made when the children are quite young.

However, they are a sort of luxury good. You should only fund them after maximizing retirement and other tax advantaged accounts, and perhaps even ensuring you have ample funds in taxable accounts.

We contributed substantially to 529s when our kids were young, but at the same time I was maxing out the other funds also, and was in a favorable and stable employment situation.

It worked fine. Other folks have had different experiences and have different observations and recommendations based on their experience. I encourage you to keep asking questions, as the different perspectives are quite useful.

Good luck

W B

"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

miamivice wrote:
My question is simple. How do you withdraw money from retirement accounts when your children are college age that you don't end up having to pay penalties and/or taxes?

The penalties can be avoided if you're old enough. In a 457b, you just have to separate from your employer and can be any age. For 401k and 403b, the age can be 55 instead of 59.5 if you leave your employer in or after the year you turn 55. So the parents' ages when the kids are in college can be important factors in deciding whether retirement accounts make sense for college savings.

Regarding taxes, you only pay them once. For 529s and Roth IRAs, you pay taxes at the time of contributions (no federal tax deduction) but can avoid taxes in the future as long as you abide by the rules (using them for education in the case of 529s and being old enough in the case of Roth IRAs). Though the contributions to Roth IRAs can be taken out at any time.

For other types of retirement accounts such as a 401k or 403b, you get a tax deduction now but have to pay tax when you withdraw. This can be beneficial if you're in a higher tax bracket now compared to the bracket you'll be in later. The tax deduction at the time of contribution can allow you to put more into the accounts than you might have been able to do otherwise. This can lead to the accounts growing "nice and big."

In either case, you can't avoid taxes. It's just a question of when you'll pay them.

Other factors to consider include your current tax bracket, expected future tax bracket, ability to cash flow college expenses in the future, whether or not you're maxing the space you have available in retirement accounts, whether your own retirement savings are on track, whether or not you get a state tax deduction for a 529, and the expected cost of college in the future. Retirement accounts offer flexibility since 529s have to be used for education to avoid taxes and penalty. It is possible to over-contribute to a 529 and have extra money left over. For example, a child may not go to college or college costs could go down in the future.

Ron Ronnerson wrote: Retirement accounts offer flexibility since 529s have to be used for education to avoid taxes and penalty. It is possible to over-contribute to a 529 and have extra money left over. For example, a child may not go to college or college costs could go down in the future.

I disagree that retirement accounts offer flexibility. Eventually, they do (when a person reaches the retirement age), but they not flexible until that point.

If a person wants flexibility, taxable is the way to go. Money in a taxable account can be used for any purpose at any time without financial penalty. Of course, you give up your tax advantages if you go that way.

Ron Ronnerson wrote: Retirement accounts offer flexibility since 529s have to be used for education to avoid taxes and penalty. It is possible to over-contribute to a 529 and have extra money left over. For example, a child may not go to college or college costs could go down in the future.

I disagree that retirement accounts offer flexibility. Eventually, they do (when a person reaches the retirement age), but they not flexible until that point.

If a person wants flexibility, taxable is the way to go. Money in a taxable account can be used for any purpose at any time without financial penalty. Of course, you give up your tax advantages if you go that way.

I agree that taxable is even more flexible. I was just speaking of retirement accounts vs. 529 accounts.

Ron Ronnerson wrote: Retirement accounts offer flexibility since 529s have to be used for education to avoid taxes and penalty. It is possible to over-contribute to a 529 and have extra money left over. For example, a child may not go to college or college costs could go down in the future.

I disagree that retirement accounts offer flexibility. Eventually, they do (when a person reaches the retirement age), but they not flexible until that point.

If a person wants flexibility, taxable is the way to go. Money in a taxable account can be used for any purpose at any time without financial penalty. Of course, you give up your tax advantages if you go that way.

I agree that taxable is even more flexible. I was just speaking of retirement accounts vs. 529 accounts.

I understand what you were saying. But I don't agree that retirement accounts offer flexibility (until the day you retire). They're rather inflexible until that point. You can withdraw Roth IRA contributions or take out a 401k loan (which has to be paid back to avoid penalty) but otherwise you're out of luck.

Here's a way you can withdraw from your 401k or TIRA tax-free and use the money for college. You, the taxpayer, quit your job for several years to go back to school full-time. Since the withdrawal is used for college fees (see IRS rules for what is allowed), there is no early withdrawal penalty. And there are no taxes if the withdrawal is your only income for the year and is below the amount where taxes kick in. In other words, withdrawals that are the same amount as your standard (or itemized) deduction plus exemptions are taxed at 0%. In the 10% tax bracket, further withdrawals are taxed at 10%. That is pretty close to tax-free, isn't it?

miamivice wrote:I have seen a lot of advantages of this, including flexibility, not counted in FAFSA, ...

The withdrawal won't be included when you apply for financial aid, before you start college. But after you have taken a withdrawal and it shows up on your tax return, the FAFSA year that uses that tax return will likely take the withdrawal into account. "Hey, this guy has a TIRA that he is willing to use for college expenses, so I guess he doesn't need so much financial aid any more."

miamivice wrote:I have seen a lot of advantages of this, including flexibility, not counted in FAFSA, ...

The withdrawal won't be included when you apply for financial aid, before you start college. But after you have taken a withdrawal and it shows up on your tax return, the FAFSA year that uses that tax return will likely take the withdrawal into account. "Hey, this guy has a TIRA that he is willing to use for college expenses, so I guess he doesn't need so much financial aid any more."

Agreed. Withdrawals from a IRA would be counted as income, would affect financial aid years 2 and beyond for college.

Ron Ronnerson wrote: Retirement accounts offer flexibility since 529s have to be used for education to avoid taxes and penalty. It is possible to over-contribute to a 529 and have extra money left over. For example, a child may not go to college or college costs could go down in the future.

I disagree that retirement accounts offer flexibility. Eventually, they do (when a person reaches the retirement age), but they not flexible until that point.

If a person wants flexibility, taxable is the way to go. Money in a taxable account can be used for any purpose at any time without financial penalty. Of course, you give up your tax advantages if you go that way.

I agree that taxable is even more flexible. I was just speaking of retirement accounts vs. 529 accounts.

I understand what you were saying. But I don't agree that retirement accounts offer flexibility (until the day you retire). They're rather inflexible until that point. You can withdraw Roth IRA contributions or take out a 401k loan (which has to be paid back to avoid penalty) but otherwise you're out of luck.

I get what you're saying as well. The funds in retirement accounts can't be used until later without penalty. However, money being saved in a 529 for college expenses while kids are young is sort of in the same situation. Now let's say that later day finally arrives. If someone's kid does go to college and it's costly, they may be able to access their retirement accounts to help pay for it if they meet certain criteria (such as whether they're retired or are beyond a certain age or just using the contributions in their Roth accounts). On the other hand, let's say a person's kid doesn't go to college or gets a scholarship or college turns out to be less expensive than thought, a lot of money in a 529 may not be ideal. If that money is instead in retirement accounts, the person can avoid the penalty once they're eligible to withdraw and buy whatever they wish with it. If they saved funds in a Roth 401k or Roth 403b, they would not have to pay tax at that later time either (as tax would have been paid when the contributions are made, similar to a 529).

Ron Ronnerson wrote:
I get what you're saying as well. The funds in retirement accounts can't be used until later without penalty. However, money being saved in a 529 for college expenses while kids are young is sort of in the same situation. Now let's say that later day finally arrives. If someone's kid does go to college and it's costly, they may be able to access their retirement accounts to help pay for it if they meet certain criteria (such as whether they're retired or are beyond a certain age or just using the contributions in their Roth accounts). On the other hand, let's say a person's kid doesn't go to college or gets a scholarship or college turns out to be less expensive than thought, a lot of money in a 529 may not be ideal. If that money is instead in retirement accounts, the person can avoid the penalty once they're eligible to withdraw and buy whatever they wish with it. If they saved funds in a Roth 401k or Roth 403b, they would not have to pay tax at that later time either (as tax would have been paid when the contributions are made, similar to a 529).

Ron Ronnerson,

That is not the worst possible outcome.

For example, some folks assume that they will be fully employed over the next 20 years. They funded their 529 and they do not fully contribute to their 401K account. They assume that X% to the 401K is good enough since their retirement will be fully funded with their full employment over the next 20 years. And, they buy a big house too.

1) They are paying 25% and more tax for their 529 contributions.

2) If they are not fully employed over the next 20 years, they need to use the money from 401K and 529. They pay penalty to use the money.

3) They lose their houses.

It had happened and it will happen again. It only takes a recession and 1 to 2 years of unemployment for this to happen to many folks. Historically, there was at least one US recession every 10 years. The last US recession was 2007/2009.

The only way I see that you could avoid taxes and penalties from retirement account are as follows:

1. You are not working/have an earned income while your kid goes to college.
2. Withdraw Roth contributions first which are not subject to penalty/tax.
3. You withdraw Roth earnings up to your tax deductions/exemptions. Earnings used for school expenses for you, spouse, or child are not subject to the 10% penalty.
4. You live off your taxable account up to the 15% tax rate. Long term capital gains are 0% in this bracket so you pay 0 tax.

So let's say you file married jointly, you take the standard deduction, 3 exemptions. This gets you something like $24,000 tax free income you could take from Roth earnings. Then you take about $50,000 as long term capital gains from taxable account to live on (75,900-24,000). 75900 is 2017 tax bracket cutoff for being in the 15% tax bracket. You would not pay any penalty or tax at all.

Remember any Traditional IRA/401K conversions to Roth must be in the account for 5 years or more to be used in this way. I think you can also withdraw Traditional IRA penalty free for college expenses. But not 401K, this is always subject to 10% penalty.

Others chime in here if I'm missing something.

Last edited by coupleofcents on Sun Jul 16, 2017 1:13 pm, edited 8 times in total.

Ron Ronnerson wrote:
I get what you're saying as well. The funds in retirement accounts can't be used until later without penalty. However, money being saved in a 529 for college expenses while kids are young is sort of in the same situation. Now let's say that later day finally arrives. If someone's kid does go to college and it's costly, they may be able to access their retirement accounts to help pay for it if they meet certain criteria (such as whether they're retired or are beyond a certain age or just using the contributions in their Roth accounts). On the other hand, let's say a person's kid doesn't go to college or gets a scholarship or college turns out to be less expensive than thought, a lot of money in a 529 may not be ideal. If that money is instead in retirement accounts, the person can avoid the penalty once they're eligible to withdraw and buy whatever they wish with it. If they saved funds in a Roth 401k or Roth 403b, they would not have to pay tax at that later time either (as tax would have been paid when the contributions are made, similar to a 529).

Ron Ronnerson,

That is not the worst possible outcome.

For example, some folks assume that they will be fully employed over the next 20 years. They funded their 529 and they do not fully contribute to their 401K account. They assume that X% to the 401K is good enough since their retirement will be fully funded with their full employment over the next 20 years. And, they buy a big house too.

1) They are paying 25% and more tax for their 529 contributions.

2) If they are not fully employed over the next 20 years, they need to use the money from 401K and 529. They pay penalty to use the money.

3) They lose their houses.

It had happened and it will happen again. It only takes a recession and 1 to 2 years of unemployment for this to happen to many folks. Historically, there was at least one US recession every 10 years. The last US recession was 2007/2009.

KlangFool

Sounds like you are speaking from some personal perspective, KlangFool. It is certainly worthy of including what you mention in the range of scenarios for parents who will be financing, or helping to finance a portion of their children's college education(s). No doubt, a Monte Carlo simulation should include a recession causing a downsizing in a company or industry that could lead to a parent or both parents loss of job, possible loss of house in the worst possible outcome scenario.

One of our current household incomes is predicated on supply/demand issues that could - at any given moment in time - lead to a retrenchment in employees. That was also in place as a possibility or fear during the last recession - just as we were gearing up to send our two to college. Retrenchment did occur with several colleagues being released, severe budget cuts, and salary freezes for several years. The one of us, fortunately, only suffered the latter, but would join you in advising parents should consider the full range of scenarios as they save and prepare for their children's college education funds. It put enough fear in our household to prepare for a wider range of scenarios that still could hit before retirement age is reached with our own planning.

Yardeni Research, Inc. did a nice data gathering of bull & bear markets & corrections which are a reality for all of us - be it in the year leading up to and preparing to send a child to school, as well as while they are at school.

2010, 2011, 2015, and 2016 being the most notable corrections since coming off of the 2008=9 lows. As you mention - just in sheer terms of recessions/corrections - the amount saved for a college education will face stresses along the way and catch both bull and bear markets if we are talking about a 18-22 year time frame from birth to graduation. Our funds for our children's education began in 1993 and went all the way to 2017. 100% equities of course, so they went through quite an amazing bull market in the 90's, as well as the dot-com bust and loss of 50% or so, and the financial crisis with a loss of 55% or so.

We would need to spend some more time trying to wrap our heads around the OP's quest of how to pay for it via retirement funds without penalties or taxes. Our vehicle to pay for college education was the UTMA which the only tax advantage was the kiddie tax. Plenty of taxes were paid along the way for dividends, and the capital gains when shares were sold to pay each Semester's bills once school was underway. Being that both children were claimed as exemptions on our tax returns, that meant their capital gains were taxed at our rate, as opposed to theirs. Nevertheless, the gains over the years totally financed their college educations as they both graduated with zero debt and got some nice leftovers to begin their careers. A lot of changes came along the way from when we began in 1993 (which was before ROTH IRA's and 529 plans).

Although looking at the worse possible scenario is wise, it's also valuable to look at the median as well as best possible scenario in terms of a savings plan, and sticking to that plan.

We remain interested to hear answers to OP's questions. Not because we have any children left to send to college, but just from a range of strategies.

CyclingDuo wrote:
Although looking at the worse possible scenario is wise, it's also valuable to look at the median as well as best possible scenario in terms of a savings plan, and sticking to that plan.

CyclingDuo,

A normal aka reasonable person would not fund their 529 ahead or at the same degree as their own investment. Especially with about 20 more years to go. For example, their investment asset would be more than 5 times larger than the 529.

Then again, some folks are advocating front loading their kids' 529 with a substantial asset as compared to their investment as soon as the kids were born. They either claimed that they will be fully-employed over the next 20 years or they would not mind living on the street while sending their kids to college. I do not think that is a reasonable approach.

Ron Ronnerson wrote:
I get what you're saying as well. The funds in retirement accounts can't be used until later without penalty. However, money being saved in a 529 for college expenses while kids are young is sort of in the same situation. Now let's say that later day finally arrives. If someone's kid does go to college and it's costly, they may be able to access their retirement accounts to help pay for it if they meet certain criteria (such as whether they're retired or are beyond a certain age or just using the contributions in their Roth accounts). On the other hand, let's say a person's kid doesn't go to college or gets a scholarship or college turns out to be less expensive than thought, a lot of money in a 529 may not be ideal. If that money is instead in retirement accounts, the person can avoid the penalty once they're eligible to withdraw and buy whatever they wish with it. If they saved funds in a Roth 401k or Roth 403b, they would not have to pay tax at that later time either (as tax would have been paid when the contributions are made, similar to a 529).

Ron Ronnerson,

That is not the worst possible outcome.

For example, some folks assume that they will be fully employed over the next 20 years. They funded their 529 and they do not fully contribute to their 401K account. They assume that X% to the 401K is good enough since their retirement will be fully funded with their full employment over the next 20 years. And, they buy a big house too.

1) They are paying 25% and more tax for their 529 contributions.

2) If they are not fully employed over the next 20 years, they need to use the money from 401K and 529. They pay penalty to use the money.

3) They lose their houses.

It had happened and it will happen again. It only takes a recession and 1 to 2 years of unemployment for this to happen to many folks. Historically, there was at least one US recession every 10 years. The last US recession was 2007/2009.

KlangFool

KlangFool: I'm glad you made this point. I completely agree. Many people assume things will go smoothly until retirement and things don't always go according to plan. As you pointed out, people sometimes lose jobs earlier than expected. They are not always able to find work again right away and, if they do, it may pay less. Sometimes, they are unable to work due to an illness or injury and are forced to retire early. These types of possibilities need to be kept in mind.

Most people are not only not maxing out their retirement space but saving too little for a secure and comfortable retirement for themselves. I just think that should be made a a higher priority. If a person falls short of their retirement goals, they could be in real trouble. If they don't have a 529 established or don't have much in a 529 account, there are other options available. In addition to the parents using retirement funds for college (if eligible to do so without penalty), they might be able to cash-flow college expenses when the time comes, or pay from other savings such as a taxable account. Also, the kid might earn a scholarship, get a part-time job, get financial aid, get a loan, or do some combination of these things. The kid might attend community college for the first couple of years. They could attend a state school where they are from rather than an expensive private school. If the college is close to home, they could live with parents and save a decent amount that way.

Since a couple of people above have shared personal stories, I'll add a bit of mine. I went to a good public university on a scholarship and lived at home to save on room and board. My sister attended a community college for two years and then transferred to one of the best public universities in California while living at home to save on room and board. College definitely used to be less costly than it is today but the possibilities to do it less expensively do still exist. My mother is in her 70s and not in the best financial situation these days. I'm glad she didn't spend a bunch of money for our college and instead has enough to get by. Most Americans are sadly in a similar or worse situation than my mom. They need to prioritize their own futures. I think most kids would prefer that than having to worry about their parents when they get older.

I'll add one more thought. There could be changes in the years ahead to make college more affordable. If the trend for college reverses and "reverts to the mean," a large 529 balance may be less desirable than a large retirement account balance. I'm not saying I expect this to happen but simply that it could. I remember paying more for gas 10 years ago than I do today and there was talk about how prices would continue to go up. College hopefully will cost less in the future too. I guess we'll see. All that being said, if I were able to max out all my retirement space (which I am not able to do), I'd probably save some in a 529. I'd try not to overdo it, though.

CyclingDuo wrote:
Although looking at the worse possible scenario is wise, it's also valuable to look at the median as well as best possible scenario in terms of a savings plan, and sticking to that plan.

CyclingDuo,

A normal aka reasonable person would not fund their 529 ahead or at the same degree as their own investment. Especially with about 20 more years to go. For example, their investment asset would be more than 5 times larger than the 529.

Then again, some folks are advocating front loading their kids' 529 with a substantial asset as compared to their investment as soon as the kids were born. They either claimed that they will be fully-employed over the next 20 years or they would not mind living on the street while sending their kids to college. I do not think that is a reasonable approach.

KlangFool

I think front loading or funding a college education - be it in a 529, an UTMA, or pre-paying the full college tuition at some universities that offer that option are all more or less in the same realm.

We chose to front load our children's UTMA's during their first 5-10 years to take advantage of "time in the market". At the time, and with the careers we had, we certainly were not banking on full employment straight through for 20 years. There was a lot of unknown for us - including a move overseas for many years. In fact, my spouse took several years off from work as the children were young. Then slowly worked her way back in to employment with part-time, and then took time off again once we moved back to the US. Eventually, she landed full time employment with benefits once we felt the children were old enough to allow us to become a dual income family again.

The risk of front loading a child's education account (whatever vehicle is used) many bring up is they may not go to college, let alone graduate from high school. In our household, there was no choice. We whipped 'em into shape from day one and never let up. Not going to college was not a choice in the pull down menu of life under our roof and tutelage. Getting involved with the wrong crowd, drugs, booze, crime, etc... was not a choice. The law was laid down hard and swift at any deviation.

But in the situation of a parent or worse - both - losing their employment due to recession, corporate downsizing, disruptive technology, health, etc.... and then the finances leading to a choice of living on the street to send the kids to school - no, that's when choices and decisions change for the reality of the situation. Student loans are available, raiding the education accounts to cover needs, etc.. would usurp living on the street.

We're not trying to overlook whatever it was you personally went through, but the power of our human capital usually allows for continued savings on the home front once the children are finished with their education. If one had children later in life, this could become an issue if a job is lost at an older age. Point being, focusing on contributing savings back to the parents once the schooling is out of the way is a normal catch up for some - even if they front loaded the children's education accounts in the early years. With the average career change happening 5-7 times in the working career of an adult, the Bureau of Labor Statistics data that says the average US worker has 10 jobs before they are age 40, and Forester Research saying that today's youngest workers will hold 12-15 jobs in their lifetime - it's almost a given that our human capital has to be flexible.

I am struck by how this discussion has illuminated differing perspectives based on individual's perception of their own experience and their differing values vs financial considerations.

I have my own. When I was growing up our family finances were chaotic and constrained. This was a source of uncertainty and stress. At that time I vowed I would never, ever have my family experience that. I was able to attend a fine university with scholarships and my own earnings, which led to a fulfilling career.

My experience gave me a horror of debt and an appreciation of the power of education to change lives. So maintaining my career, saving for our son's university educations, avoiding debt, and living well below our means to do all this were priorities. My wife was even more adamant than I about education of our children as a priority.

For us early investment in educational funds worked out well, and I am convinced it is a prudent path. As much as anything else, it is an investment in the future.

Nothing in life is certain - there are many contingencies - death, illness, job loss, any number of tragedies. You cannot predict them, nor effectively plan to cope with all of them. You go forward according to your values and standards and adjust as life happens, which is what everyone here appears to be doing.

Good luck to all.

W B

"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

No idea to OP's question. And we used a lot of strategies in our era, which was before Roths.
funding for college costs is daunting for anyone and especially for those who want to go to an OOS or private.
This morning, I had an urge to view CollegeConfidential (10+ year participant, aged out) and saw the costs for our son's alma mater ; 11 years done.
YMMV

Our approach has been to max all retirement accounts and when the kid hits college, to fund tuition with what would have been retirement contributions. Otherwise yea, pulling from taxable accounts would offer more flexibility.

Other options: military, scholarships, loans, loan forgiveness programs etc.. No need to drain your ability to fund your retirement for the sake of paying educational expenses if you have to make that choice.

529 money can be pulled out without penalties and tax free if the child receives a scholarship or is attending a military service academic institution like West Point or the Air Force Academy. You can also pull the money out if your child lives at home with you up to the amount that their university posts for off campus boarding. I have a friend who is pulling the money (tax free! penalty free!) because their child unexpectedly went to a service academy and another whose child chose to live at home and received a ton of scholarships to their local flagship university. One family is keeping the money and investing it for themselves now, the other family is giving it to the student directly.

If you can afford to fully invest for your retirement AND save for college, there is nothing that beats the benefits of the 529's tax benefits. If you and your spouse went to college, chances are great that your kids will too. If you live in a state that give a deduction for investing in a 529, it is even better! Sadly, my state does not...

Also, if you choose to leave the 529 money in there, you can change the beneficiary to grandchildren when they are born and let it grow tax free for another couple of decades!

CyclingDuo wrote:
Although looking at the worse possible scenario is wise, it's also valuable to look at the median as well as best possible scenario in terms of a savings plan, and sticking to that plan.

CyclingDuo,

A normal aka reasonable person would not fund their 529 ahead or at the same degree as their own investment. Especially with about 20 more years to go. For example, their investment asset would be more than 5 times larger than the 529.

Then again, some folks are advocating front loading their kids' 529 with a substantial asset as compared to their investment as soon as the kids were born. They either claimed that they will be fully-employed over the next 20 years or they would not mind living on the street while sending their kids to college. I do not think that is a reasonable approach.

KlangFool

I'm not sure exactly how to respond to this. I haven't read that many folks front load 529 with substantial amounts of assets, except for one poster named miamivice (me). I dumped a large amount into 529s when my wife was pregnant with our children, and have not added anything to them since then. It appears that your comments are directed to me. Your comment about "reasonable" people don't do what I did is borderline offensive.

Yes, I invested heavily in my child's future education before I had even met them. This turned out to be an excellent investment.The return on investment has been 13.6% over the last seven years, which is nothing to laugh about.

Should something bizarre happen and we face homelessness in the future (probably about 1 in a 1000 or maybe 1 in 10000) we can simply liquidate the 529 and use the money on ourselves. Sure there will be penalities (10% penalty + ordinary capital gains tax, which would be 0% if we are facing homelessness). While paying a penalty is not a good thing if one can avoid it, the 529 money is available for other purposes if need be.

However, homelessness is not a practical outcome. My wife and I have stable and secure jobs, and we have an emergency fund that would allow us to sustain our lifestyle for about 9 years if both of us lost our jobs today. So, I don't think that's a logical argument.

Would I advocate others to fully fund their children's 529 while they have a bun in the oven? Well, if they have the financial resources (real solid retirement plan, healthy taxable, and stable employment) it would be something that I'd encourage. There's no disagreement that one needs a healthy retirement account balance before considering the 529.

In our case, we had all three. Plenty of funds in taxable, very solid retirement accounts, and stable employment. A 529 for our family is a no brainer. By front loading a 529, we'll not only save a lot in capital gains tax, we'll also give ourselves a lot of financial freedom when our children are in college by not having to cash flow college.

big blue sky wrote:529 money can be pulled out without penalties and tax free if the child receives a scholarship or is attending a military service academic institution like West Point or the Air Force Academy.

WIthdrawals due to scholarship are penalty free but not tax free. One has to pay ordinary income tax (not long term capital gains tax) on appreciation if the withdrawal is due to scholarship.

May be I am wrong but front loading 529 or similar account while the child is an infant seems to be option only for BH who were already in the 2-comma club at that time. At least they never had to give up funding for retirement for front loading 529. Please correct me if your personal experience is contrary to that.

wrongfunds wrote:May be I am wrong but front loading 529 or similar account while the child is an infant seems to be option only for BH who were already in the 2-comma club at that time. At least they never had to give up funding for retirement for front loading 529. Please correct me if your personal experience is contrary to that.

I wasn't two comma by any stretch. Mid six figures I believe.

I didn't alter my retirement savings contributions because of the 401k. Rather I moved money from my taxable account to a 529. Same strategy for both child #1 and child #2.

wrongfunds wrote:May be I am wrong but front loading 529 or similar account while the child is an infant seems to be option only for BH who were already in the 2-comma club at that time. At least they never had to give up funding for retirement for front loading 529. Please correct me if your personal experience is contrary to that.

I wasn't two comma by any stretch. Mid six figures I believe.

I didn't alter my retirement savings contributions because of the 401k. Rather I moved money from my taxable account to a 529. Same strategy for both child #1 and child #2.

miamivice,

To complete the whole picture, since you choose not to max up your Trad. 401K contribution, you are essentially paying 25% or more tax to move that money into 529 accounts. You may have the luxury to do this. But, this does not necessarily apply to others.

The state tax deduction in my state (Oregon) makes 529 a no brainer to save the almost 10% state income tax. We fund our retirement accounts significantly (already maxing out 401k with also a significant match) but do not max out 2 Roth's. We plan to fund a 529 to some extent to take advantage of the state tax deduction and that money will come from what would be a Roth contribution. We will not over fund the 529 though. The risk of our child not going to college is one I'm willing to make in this case compared to the benefit. The Roth and the 529 should be enough to fund college.

wrongfunds wrote:May be I am wrong but front loading 529 or similar account while the child is an infant seems to be option only for BH who were already in the 2-comma club at that time. At least they never had to give up funding for retirement for front loading 529. Please correct me if your personal experience is contrary to that.

I wasn't two comma by any stretch. Mid six figures I believe.

I didn't alter my retirement savings contributions because of the 401k. Rather I moved money from my taxable account to a 529. Same strategy for both child #1 and child #2.

miamivice,

To complete the whole picture, since you choose not to max up your Trad. 401K contribution, you are essentially paying 25% or more tax to move that money into 529 accounts. You may have the luxury to do this. But, this does not necessarily apply to others.

KlangFool

No, that's not correct. I've explained this a few times to you, but you choose not to listen and promote your anti 529 mentality.